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Many seniors have unsecured debt – either from credit cards, medical expenses, or personal loans.  Americans in retirement now are more likely to have debt and to have high levels of debt than past generations.  When debt gets overwhelming, it can be hard to know what to do.  This is where debt settlement and debt negotiation companies make very tempting offers.

How Debt Settlement Works

These companies will often promise to help you get out of debt by settling the debts quickly.  However, they often charge steep fees for these services, and the process is anything but quick.  Debt settlement or negotiation programs are generally for-profit companies.  Your participation in the program may put you into more debt, and you may not get the hoped-for results.

There are variations in how they work.  Typically, the debt settlement company tells you to stop paying your creditors and to make monthly payments to the debt settlement company.  The company will hold your funds in escrow—a type of bank account—and will take extra fees for administering the escrow account. After accumulating enough funds to make an offer for a lump sum payment, the company is supposed to contact your creditors to negotiate a settlement for less than what you owe. Sometimes they are successful, but there are many drawbacks. For example, these companies have no special pull or influence with your creditors.  They cannot guarantee any better results than you could get yourself.  Meanwhile, your interest and fees on the debt can continue to accumulate, while your credit score continues to drop—exactly the same as it would if you were not involved with the program.

While some people find it helpful to have the monthly payment deducted so they are not temped to spend it, you will be paying to have your money held in escrow by a third party instead of letting it accumulate in your own bank account.  And there is always the risk that you will entrust your funds to a company that intends to defraud you.

Alternative Options to Using a Debt Negotiator

What debt negotiation or settlement companies do not tell you is that negotiating to settle debt is something that you can do yourself, or get help with from a local nonprofit.  Additionally, if you are low-income and without significant assets, you may be judgment proof.  Judgment proof means your income or assets are protected, and can’t be seized by creditors to satisfy money judgments.

Be sure to look into all your options before choosing debt settlement or negotiation.

Consider working with a non-profit consumer credit counseling service, rather than a for-profit entity. If you do choose to go with a debt settlement company, do your research and read the fine print in your contract.  Be sure that you understand your rights and obligations and what to expect.

Red Flags:

  • The company wants fees upfront (in addition to the fee for servicing the escrow account) before settling debt.
  • It promises it can settle your debt for a specific percentage of what you owe.
  • The company tells you to stop communicating with creditors.
  • It promises it can stop lawsuits by creditors.

If you are a senior over 60 in Contra Costa looking for help with debt issues, contact Contra Costa Senior Legal Services for assistance.  For more information about the debt collections process, check out our Consumer Debt Collections Overview.